Quiet Millionaire (eBook)

Chapter 2

Make Money Be Your Servant

To be a master over your money and be in control of your future, you must learn to manage money to serve as the fuel for building a life of happiness and fulfillment. Only then will you know how to best balance living for the present moment while planning for the future. At times, do you feel overwhelmed by your daily financial commitments as well as the big-dollar obligations such as mortgage or rent, loans and credit cards, automobiles, groceries? If so, you may not be managing your personal finances and cash flow wisely. You’re a servant to your money, not a master of your money.

“Money is a good servant but a bad master.” Francis Bacon

Having an out-of-control financial situation can increase your debt and inhibit putting adequate amounts of money aside for achieving your dream lifestyle, and funding future needs, wants, and unexpected events. In turn, this often leads to money anxiety, stress, and conflicts. The quiet millionaire® refuses to live this way. Maintaining a positive cash flow is the core of intelligent personal finance. Just as a business needs to be profitable and maintain a healthy cash flow, so does the “business” of running a personal financial life. If successful companies have a financial business plan and cash management systems, then why shouldn’t individuals develop a personal financial plan and management of their cash flow as well?

Know Where Your Money Goes

Staying on top of where you’re spending money and making necessary adjustments is smart. Some people earning high incomes are notoriously lax about managing their cash flow because they don’t feel as pressured financially. While they may not build up a lot of debt to fund their materialistic lifestyles, they often fail to pay enough attention to the fact that they are not saving sufficiently for the big financial commitments, like starting a business, funding college educations and retirements. Without being aware of it, they are creating a future cash flow problem because they do not evaluate, plan, and save accordingly for their future money requirements.

The increased number of two-income households has fueled consumer spending. Because of the combined higher income levels, there is a false sense of financial security. Expensive houses, multiple luxury cars, technological gadgets, eating out, expensive vacations, impulsive spending, and borrowing to the hilt have become the norm. Two-income families often depend upon both incomes to pay the bills, and this results in more vulnerability for potential financial trouble. In particular, when an economic recession hits, many dual-income households can experience a devastating loss of earnings and become financially overcommitted. With two employed, there’s twice as much chance that one of the earners will lose his or her job than in a single-income household.

Reasons Why Good People Get into Bad Financial Trouble, Causing Stress and Anxiety

Impulsive and Compulsive Spending: With all the advertising and media enticements for goods and services, it’s more difficult than ever to control impulsive and compulsive spending. “Keeping up with the Joneses” has become a hallmark way of life. We’re out for more and bigger: homes, stuff for the homes, new cars, another new car, clothes, jewelry, gifts, electronic gadgets—you name it, we want it, we need it!

Unfortunately, it’s easier than ever to get what we want. We don’t even have to leave the house to buy things, with the convenience of online shopping. Tempting deals abound, many are even interest free (for a while), and you often don’t have to start paying for it until the next year. You get the picture: the easy dollars spent can add up fast to become potentially devastating cash flow problems for tomorrow. Here are some reasons why.

Poor Cash Management Practices: We know from statistics that most family arguments develop around money issues, sometimes creating irreconcilable differences because an inability to control spending increases emotional conflict and causes further financial damage. Poor cash management practices, leading to financial anxiety and stress, are a major contributor to divorce. Moreover, reckless spending can even force a bankruptcy, an action for high-income earners that is more times than not a result of unintelligent financial management practices. Keeping more money than you spend and monitoring spending habits reduce financial stress and struggles. Maintaining a positive cash flow is the way you can avoid financial trouble

Poor Communications: The quiet millionaire® recognizes that good communication and a sense of working together are the keys to harmonious and successful family financial management. In some families, one person may control how the family’s money is spent. In other situations, family members may be spending money just as they please. For successful family financial management, planning meetings and cooperative discussions can be conducted for understanding and agreeing on the family’s spending and savings plans. Just as successful companies schedule corporate board meetings, so should there be family planning meetings for financial peace and security.

Easy Credit Borrowing: Overspending often occurs because of today’s easy credit borrowing. Even reputable banks behave as irresponsibly as loan sharks, tempting the most un-creditworthy of households to borrow foolishly. High-interest-rate consumer debt, especially credit cards, is flat out bad for your financial health. Not only are the interest rates high and not tax deductible, but also the impact upon cash flow is horrendous. For example, the interest cost for $12,000 of credit card debt charging a 21% interest rate represents a $210 per month or a $2,520 per year out-of-pocket cost, without reducing the debt. In a 25% income tax bracket, this means that $3,360 must be earned and $840 (25%) in taxes must be paid before the $2,520 in annual credit card interest can be paid. The result is that your hard-earned income is used to merely “rent” money from the credit card companies—valuable money that with controlled borrowing could be in your pocket for additional savings. Very often, high-income earners won’t or can’t track where they spend their money, and the biggest dollar expense category on their cash flow worksheet is termed “miscellaneous” or “other.” They don’t consider that the failure to track their uncontrolled discretionary spending can cause a serious cash flow problem. Most people are shocked when the totals for their spending categories are accurately accounted for. Especially surprising is how all the little daily routines can add up so quickly to represent big expenditures. Impulse spending often is a contributing reason for unhealthy credit card borrowing and cash flow crunches.

Automatic Teller Machines (ATMs): Using automatic teller machines (ATMs) allows ready access to cash that can be easily spent without any recording of the transactions. ATM usage is another reason why the biggest single expense category in a budget for many households is termed “miscellaneous” or “other.”

Identity Theft: With respect to cash flow monitoring and spending, there’s the rapidly growing problem of identity theft. Unfortunately, it may not be a matter of if, but more likely a high probability of when this will happen to you. Therefore, you should obtain at least annually a copy of your credit report. This will help to monitor whether someone else is spending your money. At times, you may not be aware of identity theft because the transactions are in small amounts relative to your spending patterns and therefore may not trigger red-flag alerts. By reviewing credit reports on a regular basis, you can wisely monitor your credit reporting information for inappropriate transactions. Another suggestion for partially protecting yourself from the threat of identity theft is to use a heavy-duty paper shredder to destroy all papers that contain any personal data. In addition, there is no reason to make your Social Security number and credit card information readily available to just any company or individual who requests it. You should be cautiously selective and suspicious about complying with such requests. Furthermore, you should be conscious about inadvertently displaying your Social Security number and credit card information. Your computer also makes you vulnerable and should have a firewall installed to block unauthorized access to your financial information. Check with a computer consultant or a local store for installing the most reliable computer protection, and remember that you must always update it to protect yourself from future threats.

Ways to Keep Cash Flow Positive, Avoid Costly Debt, Eliminate Financial Anxiety, and Save for Future Goals

Establish a Spending Plan: By knowledgeably establishing a financial budget, or spending plan, you are able to monitor actual expenditures versus budgeted amounts for each expense category. Importantly, this cash flow monitoring process will reveal the “big picture” of whether you’re actually spending and saving money in accordance with what’s important about money to you. This ongoing process can become a task that is surprisingly easy if you use a personal finance computer software program, which makes for a more controlled cash management plan that is convenient and accurate in monitoring your financial...